Shell corporation

A shell corporation (also known as a paper company[1]) is a company or corporation with no significant assets or operations, often formed to obtain financing before beginning business. Shell companies were primarily vehicles for lawfully hiding the identity of their beneficial owners, and this is still their defining feature due to the loopholes in global corporate transparency initiatives.[2] It may hold passive investments or be the registered owner of assets, such as intellectual property or ships. Shell companies may be registered to the address of a company that provides a service setting up shell companies, and which may act as the agent for receipt of legal correspondence (such as an accountant or lawyer). The company may serve as a vehicle for business transactions without itself having any significant assets or operations.

Shell companies are used for lawful purposes such as holding assets or tax avoidance. However, they can also be used for illegal purposes such as tax evasion, hiding stolen assets, or money laundering.<[3] Anonymity, in the context of shell companies, relates to anonymity of beneficial owners of the company.<[2] Anonymity may be sought to shield personal assets from others, such as a spouse in the event of divorce, from creditors, or from government authorities.

Shell companies' legitimate business purposes are, for example, acting as trustee for a trust, and not engaging in any other activity on their own account. This structure creates limited liability for the trustee. A corporate shell can also be formed around a partnership to create limited liability for the partners, and other business ventures, or to immunize one part of a business from the risks of another part. Shell companies can be used to transfer assets from one company into a new one while leaving the liabilities in the former company. Shell companies are also used for privacy and security reasons by wealthy individuals and celebrities.<[2] Accordingly, shell companies may be used to generate both pecuniary and non- pecuniary private benefits by their beneficial owners.<[4]

SEC definition

The U.S. Securities and Exchange Commission defines shell company as follows:<[5]<[6]

Shell company: The term shell company means a registrant, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB (§ 229.1101(b) of this chapter), that has:

(1) No or nominal operations; and

(2) Either:

(i) No or nominal assets;

(ii) Assets consisting solely of cash and cash equivalents; or

(iii) Assets consisting of any amount of cash and cash equivalents and nominal other assets.

Background

Some shell companies may have previously had operations that shrank due to unfavorable market conditions or company mismanagement. A shell corporation may also arise when a company's operations have been wound up, for example following a takeover, but the shell of the original company continues to exist.<[7] The term shell corporation does not describe the purpose of a corporate entity; in general it is more informative to classify an entity according to its role in a particular corporate structure; e.g. holding company, general partner, or limited partner.

Shell companies are a main component of the underground economy, especially those based in tax havens. They may also be known as international business companies, personal investment companies, front companies, or mailbox companies. While these terms are generally used interchangeably in practice, their meanings are not the same and each term is generated to refer to a different theme of illegality.<[2] Shell companies can also be used for tax avoidance. A classic tax avoidance operation may utilize favorable transfer pricing among multiple corporate entities to lower tax liability in a certain country; e.g. Double Irish arrangement.

Examples

Shell companies can be used to transfer assets of one company into a new company without having the liabilities of the former company. For example, when Sega Sammy Holdings purchased the bankrupt Index Corporation in June 2013, they formed a shell company in September 2013, called Sega Dream Corporation, into which were transferred valuable assets of the old company, including the Atlus brand and Index Corporation's intellectual property.<[9] This meant that the liabilities of the old company were left in the old company, and Sega Dream had clean title to all the assets of the old company. The former Index Corporation was then dissolved. Sega Dream Corporation was renamed as Index Corporation in November 2013.

When Hilco purchased HMV Canada, they used a shell company by the name of Huk 10 Ltd.<[10] in order to secure funds and minimize liability. HMV was then sued by Huk 10 Ltd., allowing Hilco to regain assets and dispose of HMV Canada.

As another example, the use of a shell company in a tax haven makes it possible to move profits to that shell company, in a strategy of tax evasion. A United States company buying products from overseas would have to pay US taxes on the profits, but to avoid this, it may buy the products through a non-resident shell company based in a tax haven, where it is described as an offshore company.

Countries of domicile

Typical countries of domicile of shell companies are offshore financial centres like Ireland, Liechtenstein, Luxembourg, Switzerland, Isle of Man, and the Channel Islands including Guernsey and Jersey in Europe, Bahamas, Barbados, Bermuda, Cayman Islands, and Virgin Islands in the Caribbean, Panama in Central America, and Hong Kong and Singapore in Asia. Shell companies are usually offered by law firms based in those countries.<[12] The process of establishing a shell company can sometimes be done very quickly online.<[13]

Due to federalism in the United States, shell companies are often set up in states such as Delaware, Nevada, and Wyoming due to advantageous tax regimes.<[14]<[15]

Abuse

Shell companies have been used to commit fraud by creating an empty shell company with a name similar to an existing real company, then inflating the price of its stock and quickly selling it (a pump and dump scheme).<[16]

There are also shell companies that were created for the purpose of owning assets (including tangibles, such as real estate for property development, and intangibles, such as royalties or copyrights) and receiving income. The reasons behind creating such a shell company may include protection against litigation and/or tax benefits (some expenses that would not be deductible for an individual may be deductible for a corporation). Sometimes, shell companies are used for tax evasion or tax avoidance.<[17]<[3]

Regulation

Since shell companies are very often abused for various illegal purposes, regulation of shell companies is becoming more important to prevent such illegal activities.<[23]<[24]

See also

• Alternative public offering
• Brass plate company
• Dummy corporation
• Front organization
• Holding company
• Internal competition
• Loophole
• Money laundering
• Numbered company
• Offshore company
• Offshore financial center
• Shadow banking system